Raising funds is a crucial step in a start-up’s growth journey, but it comes with its share of complexities: one of the most significant being equity dilution.

While accepting external funding may accelerate growth, it inevitably affects the ownership structure. In this article, we explain how dilution happens, its long-term implications, and the strategies to manage it, helping founders make informed decisions while maintaining control.

1. What is equity dilution and what are the causes?

Equity dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. While the absolute number of shares owned by founders remains the same, their relative ownership decreases.

Example: Imagine a startup with 1,000 shares owned entirely by the founder. If the company issues 250 new shares to investors during a seed round, the founders’ ownership decreases from 100% to 80%.

1,000 (existing) shares + 250 (new shares) = 1,250 (total) shares

1,000 shares / 1,250 shares = 80% ownership (post round)

While fundraising is the most common cause of equity dilution, it’s not the only one. For example, when employees exercise their stock options, new shares are issued, increasing the total share count and diluting existing shareholders. The same happens with a convertible loan, a debt that later converts into equity. When the conversion occurs, it dilutes the existing shareholder.

2. What is the average accepted dilution and how to assess it?

Many founders wonder how much dilution is considered acceptable and when it becomes excessive. Generally, market norms suggest that founders should anticipate 15-20% dilution per round and aim to maintain at least 50-60% ownership by Series A. This balance preserves control while maintaining attractiveness to investors. Early rounds like pre-seed and seed commonly result in 20-25% dilution, while Series B and beyond tend to see smaller increments, typically 10-15%.

Assessing acceptable dilution means balancing the startup’s runway, growth potential, and investor expectations. The objective isn’t to minimize dilution at all costs but to ensure the company raises enough capital to support its development while maintaining a healthy cap table. Too much dilution early on can severely limit flexibility in future rounds: if seed investors take a large stake, founders may end up with too little equity by Series A or B, making the company less attractive to later-stage investors. On the other hand, raising too little could result in insufficient funding to reach further milestones, and keeping dilution extremely low could signal an overvaluation, which might cause a down round later (i.e. raising at a lower valuation in the next round).

The objective is to find a balance that secures sufficient funding for growth while ensuring founders retain enough equity for as long as possible.

3. Understanding dilution through a case simulation

To illustrate this point, let’s take a concrete example: at the start of the company, the founders hold 100% ownership, giving them full control over all decisions. With each funding round, a 25% dilution is applied, gradually reducing their ownership stake and decision-making power. In our example, we only expose the rules under Belgian company law but be aware that investors will usually add specific clauses in Shareholders’ Agreement (SHA) to adapt and modify these thresholds and to allow them in veto right on some strategic and important decisions.

Pre-seed round (25% dilution)

• Ownership: Founders’ ownership drops from 100% to 75%.
• Rights: Founders still have 75% ownership, so they retain control over ordinary decisions (simple majority) and some special majority decisions (¾ needed).
• Examples of rights retained over 50%:
  • Approving the annual accounts.
  • Approving the distribution of benefits.
  • Appointing or dismissing directors.
• Examples of rights retained at 75%:
  • Approval of a capital increase/new contribution in the company.
  • Amending the articles of association.

Seed round (25% additional dilution)

• Ownership: Founders’ ownership drops from 75% to 56.25%.
• Rights: Founders still hold a simple majority (50% + 1 share), allowing them to control ordinary decisions as described above, but their influence weakens as external investors gain more voting power.

Series A round (25% additional dilution)

• Ownership: Founders’ ownership drops from 56.25% to 42.19%.
• Rights: Founders lose the simple majority (50% + 1 share) and can no longer approve ordinary decisions without other shareholders’ support.
• Rights retained with more than 25%:
  • Blocking rights for special majority decisions (75%), allowing them to veto major structural changes such as capital increase.

Series B (25% additional dilution)

• Ownership: Founders’ ownership drops from 42.19% to 31.64%.
• Rights: Founders still have blocking rights for special majority decisions (75%).

Series C (25% additional dilution)

• Ownership: Founders’ ownership drops from 31.64% to 23.73%.
• Rights: Since they now own less than 25%, founders lose blocking rights for special majority decisions (75%) and can no longer prevent fundamental corporate changes.

Here’s how equity dilution would impact the founders’ ownership and their decision-making rights with a 20% dilution per round instead of 25%.

As developed in our hereabove example, the dilution difference is substantial: with a 20% dilution per round, the founder remains the majority shareholder even after a Series A round, retaining strategic control over the company. As a general rule, dilution beyond 30% per round should be avoided, as it can drastically weaken the founder’s control and reduce incentives.

4. Long-term implications of dilution

As shown in our simulation example above, dilution doesn’t just affect ownership percentages, it also impacts decision-making power, control, and future fundraising options. As founders’ stakes get smaller, their ability to influence key company decisions decreases, making it harder to steer the business in their preferred direction. In Belgium, specific ownership thresholds determine shareholder rights. Holding 50% + 1 share gives a simple majority, allowing shareholders to approve annual accounts, appoint or remove directors, and make regular decisions. At 75%, a special majority is needed for bigger changes like modifying the articles of association or approving mergers. Reaching 90% ownership allows a squeeze-out, meaning majority shareholders can force minority shareholders to sell their shares and take full control. On the other hand, keeping at least 25% ownership gives the power to block special majority decisions, ensuring a say in critical matters.

Beyond governance, dilution also affects how investors see the company and its long-term potential. A cap table where founders own very little equity can be a red flag, as it may create risks of mismanagement in the future, potentially affecting leadership stability and long-term strategic alignment.

5. Strategies to mitigate dilution

In order to manage dilution effectively, founders can implement various strategies:

• Explore non-dilutive financing: Grants, venture debt, and revenue-based financing offer growth capital without impacting equity.
• Raise only what you need: Overfunding might provide short-term security but can lead to excessive dilution.
• Optimize valuation: A higher valuation means giving up less equity, but it also sets high expectations. If your valuation is too high, you risk a down round later (or no round at all), where you’ll have to raise funds at a lower valuation, leading to severe dilution.​
• Negotiate option pools strategically: Determine whether the option pool will be created before or after the investment. A pre-investment option pool dilutes existing shareholders more heavily (benefiting incoming investors), whereas a post-investment pool preserves more equity for current owners.

• Legal clauses negotiations: Certain legal clauses can significantly impact how dilution is managed and distributed among shareholders.

• Engage experienced advisors: Partnering with experts can help you model dilution scenarios, compute the right valuation and negotiate the right terms to maintain ownership and control.

Conclusion

Equity dilution is an inherent aspect of fundraising but should not be feared: only understood and managed. By anticipating dilution through realistic scenario planning and strategic fundraising (meaning a structured approach to securing capital at the right time, from the right investors, and under the right terms rather than raising funds opportunistically), founders can balance growth capital needs with ownership retention.

Understanding the dynamics of dilution is more than a financial exercise; it’s about maintaining control, motivating teams, and securing the start-up’s long-term vision. In the end, it isn’t about keeping the biggest slice of the pie: it’s about growing the pie for everyone involved.

At Dups, we assist founders in navigating the complexities of fundraising, from scenario modelling to negotiating optimal terms.

We combine financial and legal expertise to be able to manage every aspect of a transaction. Our goal is to help you grow your business without losing sight of your ownership objectives.‍